U.S. Macroeconomic Policy Evaluation in an Open Economy Context Using Wavelet Decomposed Optimal Control Methods

49 Pages Posted: 11 Jul 2019 Last revised: 18 Nov 2021

See all articles by Patrick M. Crowley

Patrick M. Crowley

Texas A&M University - Corpus Christi; Bank of Finland/Suomen Pankki

David Hudgins

Texas A&M-Corpus Christi-College of Business

Date Written: July 10, 2019

Abstract

It is widely recognized that the policy objectives of fiscal and monetary policymakers usually have different time horizons, and this feature may not be captured by traditional econometric techniques. In this paper, we first decompose U.S macroeconomic data using a time-frequency domain technique, namely discrete wavelet analysis. We then model the behavior of the U.S. economy over each wavelet frequency range and use our estimated parameters to construct a tracking model. To illustrate the usefulness of this approach, we simulate jointly optimal fiscal and monetary policy with different short-term targets: an inflation target, a money growth target, an interest rate target, and a real exchange rate target. The results determine the reaction in fiscal and monetary policy that is required to achieve an inflation target in a low inflation environment, and when both fiscal and monetary policy are concerned with meeting certain economic growth objectives. The combination of wavelet decomposition in an optimal control framework can also provide a new approach to macroeconomic forecasting.

JEL Classification: C61, C63, C88, E52, E61, F47

Suggested Citation

Crowley, Patrick M. and Hudgins, David, U.S. Macroeconomic Policy Evaluation in an Open Economy Context Using Wavelet Decomposed Optimal Control Methods (July 10, 2019). Bank of Finland Research Discussion Paper No. 11/2019, Available at SSRN: https://ssrn.com/abstract=3418158 or http://dx.doi.org/10.2139/ssrn.3418158

Patrick M. Crowley (Contact Author)

Texas A&M University - Corpus Christi ( email )

6300 Ocean Drive, Unit #5808
Corpus Christi, TX 78412
United States

HOME PAGE: http://patrickmcrowley.com

Bank of Finland/Suomen Pankki ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

David Hudgins

Texas A&M-Corpus Christi-College of Business ( email )

6300 Ocean Drive, Unit #5808
Corpus Christi, TX 78412
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
51
Abstract Views
433
Rank
693,387
PlumX Metrics